Advertisement

US interest rates set for lift-off

The first rise in US interest rates for nearly a decade is looming, reports Andrew Van Sickle.

15-8-13-yellen-634
Janet Yellen: raising the cost of money to control inflation

Markets are abuzz with talk of "lift-off" in US interest rates: the first interest-rate increase in America for nearly a decade is looming. When the global financial crisis broke out, the US Federal Reserve cut its benchmark interest rate to 0%-0.25%. Now, with the economy gathering strength, a small increase in the cost of money, to ensure that inflation doesn't get out of control, looks like a sensible idea, as Fed boss Janet Yellen has signalled.

Advertisement - Article continues below

Markets have pencilled in the first 0.25% rise for September, and the latest data suggests this is increasingly likely.The unemployment rate held steady at a post-crisis low of 5.3% and 215,000 jobs were created. Payrolls have grown by over 11 million since the Great Recession ended, says Barry Ritholtz on bloombergviews.com. Inflation is subdued for now, but "we are seeing early signs" of wage growth, a key source of inflation, strengthening. Job openings are on the rise and companies are finding it increasingly difficult to replace workers.

Advertisement
Advertisement - Article continues below

Moreover, remember the bigger picture, says Ritholtz. Having interest rates at practically zero "is an emergency setting". The recovery is six years old and gathering steam. "Why do we still have a Fed policy designed for an economy that needed life support?" Higher rates are simply a move back to normality. Expect that move to be very slow, however. Zero interest rates and quantitative easing (QE), or money printing, have blown up bubbles in asset markets, and littleof the developed world's debt has been paid offin the past few years.

Advertisement - Article continues below

So a sudden rise in interest rates could cause serious turbulence in markets and indebted economies.If there is another crisis, however, the Fed will be completely stuck if interest rates are still historically low, especially as thejury is still out as to what impact QEhas actually had on economic growth.So another reason to raise rates is to "put some bullets back in the exhausted gun of ordinary monetary policy", as zerohedge.com's Tyler Durden puts it.

In the short term, however, there are two reasons to anticipate a very gradual upward trajectory for interest rates, says John Authers in the Financial Times.A rate hike would further boost the US dollar, keeping a lid on inflation. The dollar has risen by almost 40% since 2008 on a trade-weighted basis (against a basket of trading partners' currencies).

And any further decline in oil, moreover, would point to less investment by American shale producers, which has bolstered overall growth in recent years. So it could be quite a while before rates rise for a second time, concludes Authers. Not so much lift-off, then, says Deutsche Bank, as "crawl-off".

Advertisement
Advertisement

Recommended

Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
MMT: what is modern monetary theory and will it work?
Economy

MMT: what is modern monetary theory and will it work?

“Modern monetary theory” – or MMT – is all the rage among progressive thinkers, especially in the United States. What is it? And does it stand up to s…
14 Jul 2020
The Fed will print whatever it takes – what does that mean for markets?
US Economy

The Fed will print whatever it takes – what does that mean for markets?

Jerome Powell, chair of the US Federal Reserve, has vowed to keep pumping money into the economy for as long as it takes to get America back on its fe…
11 Jun 2020
What Friday's stonking US jobs report means for markets
US Economy

What Friday's stonking US jobs report means for markets

At the end of last week, US employment figures gave everyone a pleasant surprise and sparked hopes of a “V-shaped” recovery. John Stepek explains how …
8 Jun 2020

Most Popular

OBR: UK house prices could fall by 12% next year
House prices

OBR: UK house prices could fall by 12% next year

The Office for Budget Responsibility says UK house prices could fall by as much as 12% next year. John Stepek looks at how likely that is.
14 Jul 2020
Three ideas for Lloyds Bank's new boss
UK stockmarkets

Three ideas for Lloyds Bank's new boss

The Black Horse needs whipping into shape. A change at the top provides a great opportunity, says Matthew Lynn.
12 Jul 2020
We’re spending more than at any time since World War II – how will we pay it back?
UK Economy

We’re spending more than at any time since World War II – how will we pay it back?

With the UK spending vast sums on stimulus measures, this year’s budget deficit will be greater than at any time since World War II. The big question,…
14 Jul 2020